While CLC is flexible in terms of the amount and timing of the conversion, the bail-in rules set out certain conversion parameters that CLC must meet in determining how to convert rescue vouchers. These parameters are intended to clarify that the objective of a bail-in conversion is to recapitalise the institution to a level that enhances market confidence and ensures that the relative hierarchy of creditors is maintained. The draft TLAC Directive also includes certain additional authorisation requirements for bail-in instruments. On June 16, 2017, the Canadian federal government released its bail rules for comment. As part of this publication (as well as on June 16), OSFI issued a draft Total Loss-Absorbing Capacity (TLAC) Directive for comment. OSFI`s draft directive will apply to D-SIBs under the federal bail-in regime and will require D-SIBs to maintain sufficient TLAC (i.e., capital plus debt that can be converted into equity under the recapitalization regime) in accordance with internationally established TLAC standards. Stress tests and capital planning ensure that banks have enough capital to survive a crisis. Living wills provide a plan to safely manage a failing bank. – Liquidity requirements ensure that banks are sufficiently liquid if they lose access to refinancing markets. – Counterparty limits limit the risk of bank default in the event of counterparty default.
The bail-in rules set out the requirements that D-SIBs must meet when issuing bail-in eligible debt securities. The regulations are designed to ensure that: I have encountered bailout evidence that only applies to banks with assets of $50 billion or more. In response, Canada referred to six “domestic systemically important banks” (D-SIBs): Bail-in rules do not include a fixed conversion rate that specifies the number of common shares that bail-in debtors would receive for each dollar of converted debt. This gives the CPEC the opportunity to establish appropriate conversion conditions based on the particular circumstances. Finally, in the context of the bail-in regime, the Office of the Superintendent of Financial Institutions has also issued a Total Loss Absorbing Capacity (TLAC) policy to ensure that D-SIBs have sufficient loss-absorbing capacity to support the recapitalization of a non-viable D-SIB. The Superintendent issued an Order in Council on September 21. August 2018 Orders to each D-SIB setting the minimum risk-based TLAC ratio at 21.5% of risk-weighted assets and the minimum TLAC leverage ratio at 6.75%. With insufficient tools to deal with failed global banks, authorities in other jurisdictions have been forced to rely on taxpayer-funded capital injections to support these banks in the interest of broader financial and economic stability. These are commonly referred to as “bailouts.” When things go wrong, depositors get nervous and run to the bank to withdraw their money.
This is called a “bank run”. A “public holiday” could also be called in the event of a massive bank run. What is essentially happening is that the bank closes its doors and the ATMs. This happened during the Great Depression and more recently in Cyprus. What actually happens with a public holiday is that the bank deposits itself. And even that wasn`t enough to save many banks during the Great Depression and in Cyprus. The circumstances of a bail-in conversion are unpredictable and are expected to have a negative impact on the market price of bail-in notes. Canada`s bail-in framework was first introduced in June 2016 through amendments to the Canada Deposit Insurance Corporation Act (CDIC Act) (for more information on the June 2016 amendments, see our May 2016 Blakes Bulletin: Amendments to Canada`s Bank Restructuring Legislation: bailout and safe haven rules for financial contracts). As part of these changes, the Canadian Deposit Insurance Corporation (CDIC), Canada`s bank resolution authority, was granted the authority to convert the bail-in of the specified liabilities and shares of a non-performing Canadian DSIB into a recapitalization of the DSIB. The proposed new rules set out the types of commitments and actions that would be subject to this bail-in conversion authority (bail-in tools) and set out other key elements of the bail-in framework. By acquiring an interest in a registrable bond, each holder or beneficial owner of that bond shall be deemed to be bound by a bail-in conversion and therefore has no other rights in respect of its bail-in debt securities to the extent that those bail-in bonds are converted into a bail-in conversion, with the exception of those provided for in the bail-in regime. If PAC were to take action against the bank under the resolution powers of Canadian banks, this could result in the exposure of debt holders or beneficial owners to losses and, in the case of repayable bonds, the conversion of some or all of the bonds.
